Partial VAT Deduction: the Pro Rata Rules

Three cost categories

• Directly for taxed activities: input VAT fully deductible.
• Directly for exempt activities: input VAT stays in the cost price.
• General costs — rent, software, accountancy: deductible pro rata.

Setting the ratio

The default pro rata follows revenue: taxed revenue divided by total revenue. A business with €300,000 taxed and €100,000 exempt revenue deducts 75% of the VAT on general costs. Where actual use tells a truer story — square metres, hours — the actual-use method may replace the revenue key.

The year-end recalculation

Through the year, deduction runs on the expected ratio; the final return of the year recalculates on the real figures and settles the difference — the same filing that carries other year-end corrections, per the filing guide.

Revision on investments

Large assets stay under observation: movable investment goods for five years, immovable property for ten. Shifts in the taxed/exempt mix within that window adjust the original deduction year by year — a point to model before buying property in a mixed business.

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This question continues in VAT on Services to the UK and in Invoicing in Foreign Currency.